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Capital Markets Weekly: Bahamas testing market appetite while hybrid debt sales indicate continuing risk demand

08 October 2020 Brian Lawson

The Bahamas has mandated banks and plans to issue shortly, but against an adverse background for its debt sustainability: elsewhere, ENI, Japan Tobacco and CaixaBank all demonstrated continuing demand for riskier assets, despite several Latin American deals being postponed.

Emerging markets

On 6 October, Latin Finance reported that Bahamas mandated banks and started marketing a dollar deal. In its May budget, the government projected a deficit in 2020/21 of USD1.3 billion or 11.6% of GDP, the "largest deficit…in the history of The Bahamas". Preliminary data for 2019/20 released at end-August showed the deficit for that year increasing to USD788.1 million versus USD219.3 million in the prior fiscal year (its lowest in a decade), reflecting a broadly-based 55.2% contraction in receipts while expenditures grew 8.8% to address COVID-19 related outlays and damage from Hurricane Dorian.

Our economist, Claudia Wehbe, warns in her latest monthly outlook that "Fiscal consolidation remains a critical cornerstone for rebuilding fiscal and external stability" while noting the need to control the weak performance of state owned enterprises, notably in the provision of electricity, water and airline services.

Mongolia claims to have "made a debt restructuring" with the issuance on 29 September of USD600 million of 5.125% 5.5-year bonds. According to Minister of Finance Chimediin Khurelbaatar, the new "Nomad" bond will fund the repayment of USD500 million 10.875% outstanding debt maturing in April 2021. Repayment of a second issue - from 2018 - has been delayed to avoid undue funding pressure. Nevertheless, the minister claimed that the refinancing will lower Mongolia's annual interest burden from USD203 million to USD176.4 million.

According to Bloomberg reports, TWF - Turkey's sovereign wealth fund - has mandated banks for a debut international bond issue, which it suggests will be arranged within 2020. In prior reports the same source has suggested it will seek to raise USD2 billion.

Slovenia has announced on 5 October its intention to redeem two issues maturing in January and April 2021 worth a combined EUR2.6 billion, and to undertake a new issue shortly, with the goal of refinancing its debt at lower costs. This followed shortly after it was upgraded by Moody's from BAA1 to A3, with the agency citing expectations of renewed debt reduction in 2021 and citing the improvement in the condition of the country's banking system, including the privatization of its largest banks.

Three Latin American bond deals have been withdrawn in recent weeks. On 2 October, Brazilian outsourcing company Atento withdrew a planned bond sale and repurchase of existing debt, planning to review the situation again "once market conditions stabilize". It follows the withdrawal of an issue and debt buyback last week by GNB Sudameris, reportedly as investors pushed for bond pricing of over 9% for the planned 10-year deal, versus expectations of mid-8% area, and Brazilian oil and gas firm Petro Rio withdrawing its planned USD450 million five-year deal, citing oil market uncertainties and recent price volatility in mid-September.

Other debt

Italian energy company ENI has obtained board approval on 1 October for a program of hybrid debt issuance worth up to EUR5 billion by end-June 2022. The program is intended to "prefund the future financial needs and to maintain a well-balanced financial structure".

The company sold a two-tranche hybrid deal on 6 October, placing EUR1.5 billion each of perpetual debt callable after 5.25 and nine years. The two tranches were priced at 2.75% and 3.375% respectively, with aggregate demand reaching EUR14 billion, particularly from the UK, France, Italy and Germany. The company's statement noted that the deal is the largest ever hybrid by an Italian corporate borrower.

Japan Tobacco has placed a debut Euro-denominated two-tranche hybrid bond which was more than six times subscribed. It placed 60.5-year debt callable after 5.5 years and 63-year liabilities callable after 8.25 years, yielding 2.376% and 2.876% respectively to initial call, versus price guidance of 2.875%-3% and 3.375-3.5%.

The sale followed a USD6.25 billion five-part sale by BAT, with their success indicating that issuers in sectors deemed "harmful" from an ESG perspective still have potentially-ample market access, although some investors such as BNP Paribas Asset Management and Axa specifically rejected involvement.

Alongside the corporate sales of hybrid debt, Spain's Caixabank - which recently announced its merger with Bankia - enjoyed clear success in the Additional Tier 1 market. It sold EUR750 million of perpetual debt on 1 October first callable after seven years, with a coupon of 5.875%, 0.5% under initial price guidance. Demand reached EUR4.1 billion, which Caixabank claimed to be the largest AT1 order book for a Spanish bank in 2020.

It was followed by Nykredit, the Danish mortgage lender, which launched a Euro-denominated perpetual deal callable after six years with price guidance at 4.75%, tightening pricing by 50 basis points in response to demand. This was followed by Credit Agricole launching a EUR750 million AT1 deal, with price guidance of 4.75% until the first call after 7.5 years.

At the time of writing, media reports suggest that Gazprom also is studying perpetual issuance in both dollars and Euros.

Equity

14 US SPAC share deals were completed last week, raising USD5.2 billion, versus the USD1.6 billion obtained from the nine conventional IPOs conducted. The largest SPAC sale was for Apollo Global, which raised USD750 million for its Strategic Growth Capital fund.

Multiple media reports claim that Airbnb will seek to raise USD3 billion in its IPO, with this potentially taking place in December.

The high-profile direct listings - the start of share trading without a new placement or secondary sale - by Palantir and Asana failed to generate much positive momentum. Trading opened well above the indicative price levels suggested: Palantir's first trade was at USD10 and it closed first day trading at USD9.73, versus a reference price of USD7.25 per share, while Asana closed first day trading at USD28.8, 37% above its USD21 reference price. However, the two firms ended their first week's trading down by eight and four percent relative to their opening levels.

BNDES raised BRL6.9 billion (USD1.2 billion) from the placement of its full 11% stake in pulp and paper firm Suzano: on 1 October, it sold 150.2 million shares at BRL46 each. The sale forms part of the Brazilian development bank's wider asset disposal program, with it having placed holdings in Vale, Petrobras and Marfrig previously (with the Petrobras block having raised USD5.2 billion in February).

Kazakh financial group Kaspi - which owns Kazakhstan's leading retail bank with a 32% share of retail loans in 2019 using a largely digital platform- has started pre-marketing for a GDR listing in London seeking to sell USD550 million equivalent on behalf of existing shareholders. The deal is reported to have been underpinned by interest from several large funds, suggesting the deal has a strong likelihood of successful completion: the firm withdrew a prior attempted sale in 2019. If successful, the deal would be the first Kazakh share sale in London since AO Alliance Bank in 2007.

Outlook and implications

The Bahamas will provide an interesting test of market appetite for Caribbean debt risk. Like its peers in the region, it faces a challenging upward trend in its debt stock, and multiple adverse factors impacting its government deficit in 2020 and thereafter.

The planned sale of debt by Turkey's sovereign wealth fund is also likely to prove testing, given the country's unconventional monetary policy (at least until recently) and growing political risks relating to Turkey, including its involvement in several regional military conflicts.

Market developments indicate a mixed risk environment. The multiple successful hybrid deals completed in the last week, notably that for ENI, Italy's largest hybrid to date, indicate continues appetite for riskier, long-duration assets. Similarly, Egypt and Bahrain have completed successful issuance in recent weeks, showing healthy demand for riskier MENA sovereign risk assets. Counterbalancing this, several Latin American deals have now been pulled on grounds of adverse market conditions and price sensitivity, without necessarily also having adverse credit fundamentals.

Within equity markets, BNDES's latest asset sale is a positive indicator, both for the scope to complete large deals in a more testing market environment and for both the bank and Brazil's fiscal position, showing continuing scope to raise funds through indirect privatization.

Posted 08 October 2020 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, IHS Markit

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